Suppliers as Financiers of the Last Resort: The Effect of Exogenous Changes in Analyst Coverage on Trade Credit Use

50 Pages Posted: 13 Feb 2019

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Francesca Toscano

Wayne State University - Mike Ilitch School of Business

Date Written: February 4, 2019

Abstract

We document a negative causal relationship between changes in the analyst coverage of buying firms and their use of trade credit, thus establishing an "information production" hypothesis of trade credit usage. We show that firms use trade credit to a greater extent when the extent of asymmetric information facing external financiers (such as banks) about buying firms increases, thus increasing suppliers' information advantage with respect to such external financers. We establish a causal relationship between trade credit use and analyst coverage using two different identification methodologies: first, using exogenous changes in the analyst coverage of firms following brokerage house mergers; and second, using an instrumental variable (IV) analysis. Our cross sectional analyses provide further support for the information production hypothesis. First, increases in trade credit usage following reductions in analyst coverage are smaller for firms with closer established lending relationships with banks and those incurring higher audit fees. Second, increases in trade credit usage following reductions in analyst coverage are larger for financially constrained firms and those headquartered in regions characterized by a higher extent of social capital.

Keywords: Trade Credit; Analyst Coverage; Information Production; Asymmetric Information

JEL Classification: G24, G32, G34

Suggested Citation

Chemmanur, Thomas J. and Toscano, Francesca, Suppliers as Financiers of the Last Resort: The Effect of Exogenous Changes in Analyst Coverage on Trade Credit Use (February 4, 2019). Available at SSRN: https://ssrn.com/abstract=3328647 or http://dx.doi.org/10.2139/ssrn.3328647

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Francesca Toscano

Wayne State University - Mike Ilitch School of Business ( email )

2771 Woodward Ave
Detroit, MI 48201
United States

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